A systematic investment plan (SIP) is an investment option provided to investors by many mutual funds, enabling them to invest small amounts on a regular basis, rather than lump sums. Investment level typically occurs regularly, monthly, or quarterly. Through SIPs, investors regularly debit a fixed sum of money through bank accounts and invest in a specified mutual fund. A number of units are assigned to the investor according to the present Net Asset value. Every time an amount is spent, the investors account earns more units. The strategy promises to free the investors by dollar-cost average from speculating on volatile markets. Since the buyer gets more units when the price is low, and fewer units when the price is high, the average cost per unit will be lower in the long run.
SIP appears to be encouraging responsible investment. SIPs are flexible; investors can stop investing in a plan at any time, or choose to increase or decrease the amount of investment. Retail investors who do not have the money to follow the successful investment are typically advised to SIP.
A mutual fund is a professionally run, open-end investment fund that pools money from several investors to buy securities. Those investors may be institutional or retail in nature. The concept is usually used in the United States, whereas the SICAV in Europe (‘investment company with variable capital’) and the open-ended investment company (OEIC) are used in similar systems around the world.
Compared to direct investment in individual shares, mutual funds have advantages and disadvantages. The mutual funds’ benefits include economies of scale, diversification, liquidity and skilled management. Such, however, come with fees and expenses for the mutual funds. Mutual funds are often known as money market funds, debt or fixed-income funds, mutual or equity funds, hybrid funds or something similar by their core investments. Funds can also be known as index funds, which are passively managed funds matching an index’s results, or are actively managed.
Why Invest in SIP?
There are many reasons as to why investors prefer investing in mutual funds through SIP, the benefits of SIP are listed below:
- Rupee Cost Averaging:
SIP investments promote phenomenon called Rupee Cost Averaging. Let’s see first, to understand it, how mutual funds are purchased and kept as investments with an example:
in October 2018, Mr. Anand has ₹60,000 on hand to invest into a mutual fund scheme. He has two options: lump sum or SIP.
>> Lump sum:
In October he wants to spend it all in one go. He goes online, signs up with an online investment platform for the mutual fund and buys ‘Units’ of a fund in return for his money. Such units of ‘mutual funds’ reflect his ownership of the fund. Let’s say that the NAV was ‘200’ in October, and Mr. Anand got 300 units for his investment of some 60,000 lump sums.
In the same case where the NAV is ‘200’ in October. Mr. Anand bought 100 units for around 20,000 units. The NAV rose to ‘250’ in November and only 80 units were fetched by Mr. Anand’s next investment of some 20,000-for the same amount. The NAV fell to ‘100’ in December, and he gets 200 units from his ~20,000. So through SIPs, Mr. Anand’s ₹60,000 has bought him a total of 380 units only because of the fluctuating market.
- Minimizes risk:
Investing small sums on a monthly basis instead of one big amount at a time means the investments can be stopped at any time the investor wishes. The investor may simply avoid investing in the rare and unfortunate case that a high-performing fund has a change of fund manager, or a risky investment doesn’t pan out well, or that the fund produces below-average returns over an extended period of time. The SIP can be stopped easily and the investment can be made into another well-performing fund to recover any negative returns.
Back to the investment itself, earnings in a mutual fund scheme invested by SIP are added, thus increasing its value. Since subsequent investments are made over the course of the investment period, the overall value will continue to rise by adding earnings to itself to allow greater growth.
It can not be understated how critical proper periodic financial planning is. Many would-be investors earn more than necessary to invest and multiply their money but don’t save enough to invest because of insufficient financial planning. Strict monthly budgeting will allow huge amounts to be obtained with very little investment. Systematic investment strategies with standing guidance in one’s bank account will take to a whole new level the old maxim ‘a penny saved is a penny won’.
- Financial discipline:
An individual can create financial discipline by ensuring that an investment has to be made every month. It is nothing but being careful and attentive when it comes to dealing with one’s wealth-a quality that is largely absent in modern India. Usually, a typical salaried corporate employee between the ages of 25-30 learns way too late that he/she spends too much on non-vital and essentially needless stuff daily. When this understanding arises, saving and spending on only the basics are given more priority. With a Drink, optimistic spending is classified as a month-to-month recurring investment. Through allocating funds separately for this, the remaining revenue is split in a calculated and controlled manner among essential expenses.
Investors have no need to go out of their way to invest in SIPs. Every month, the amount is automatically deducted from the bank account of the investor at a given date. In an efficient and detailed dashboard like the one in the FundsIndia mobile app, everything can be tracked online, the status of the investment, its returns being generated etc. Investors may also simply sign and send post-dated checks to ensure that investments are made at the appropriate investment pace.
Best SIP Plans to Invest
- SBI BlueChip Fund Growth
- Franklin India Equity Fund Growth
- Mirae Asset India Equity Fund Growth
- HDFC Mid-Cap Opportunities Fund Growth
- ICICI Pru Bluechip Fund Growth